WSJ: Guitar Center to be acquired by its major creditor

Eric Garland Guitar Center, Retail Trends 30 Comments

Oh, Guitar Center. Back in November. I wrote a casual post about how their junk bond status would mean the company wasn’t doing great, much in the way that when your car is repo’d, you’re not too wealthy. It went viral. 150,000 views in five days.

Their executives and employees protested. Oh, how they protested. They hatemailed. Crawled onto my site pretending not to be from GC. (Look down the comments section, it was epic.)

A Vice President from the company emailed me that I had written “the most ignorant blog post of the year,” (quite a feat!) one that was full of “absurd claims about our organization that couldn’t be more inaccurate.” You know, the ones that came from Wall Street ratings agencies and got reported in Reuters. That their debt was unmanageable, which anybody with nine seconds of training in corporate finance could see.

Fast forward past the Christmas season.

I have yet to get an insider view of the organization, but according to the Wall Street Journal, their major creditor is trying to convert its risky debt into ownership, likely so they can get something for all that gear in the warehouses.

Ares Management LLC, which owns the majority of the music retailer’s debt, is in advanced discussions with Guitar Center owner Bain Capital to take over the company, people familiar with the matter said.

The two investment firms are in the final stages of hashing out a deal to convert the Guitar Center debt that Ares owns to equity, a process they are trying to complete outside of bankruptcy court while also keeping valuable tax breaks, the people said.

Under the terms being discussed, Bain would keep a minority stake in the company, some of the people said. The exact size wasn’t clear.

Guitar Center has about $1.6 billion in debt, much of it stemming from Bain’s $2.1 billion leveraged buyout of the company in 2007. But the 253-store U.S. chain faces competition from e-commerce, and debt payments are eating into its cash flow, the people said.

I said that the debt-laden big box model was not built for the long term. I stand by my assessment. The events are playing out to make my point for me.

If CEO Mike Pratt wants to come back to this blog to make a comment, like he did last time, I welcome him with open arms.

In the mean time, you should think about the future of local retail – the kind that doesn’t end up billions in debt. It may have quite a future.